New York desperately needs more affordable health insurance options, particularly in the individual insurance, or direct-pay market. With President Barack Obama's landmark health care law, the Affordable Care Act, going more fully into effect in 2014, New York has an opportunity to open up its insurance market.

That's because, while the Affordable Care Act will make insurance more expensive in most states, it could actually help New York lower insurance costs -- if the state's policymakers are shrewd enough to use the basic framework of the law to their advantage.

The linchpin of the Affordable Care Act is its creation of state-based insurance exchanges. Starting in 2014, each state must offer an electronic marketplace where the uninsured and small businesses can shop for coverage.

In New York, state legislators basically face a June deadline to pass a legislative framework for the state exchange. If created along sound market principles, an exchange should open up the insurance market in New York, since individual insurance in the state has been in sharp decline for years.

As recently as 2001, more than 128,000 individuals were enrolled in HMOs in the direct-pay market. By 2010, enrollment had plummeted to 31,000. Premiums approximately tripled during this period. As The New York Times noted last April, "premiums for individual and small group policies have risen so high that state officials and patients' advocates say that New York's extensive insurance safety net ... is falling apart."

New York's costly insurance market is largely the result of well-meaning regulations enacted in the 1990s. In 1992, the state's Community Rating/Open Enrollment law imposed "guaranteed issue" provisions, which require insurers to offer coverage to all applicants, including those who are already sick. And it employed "pure community rating" regulations, which require plans to offer the same price to all applicants regardless of age or health status. These regulations sharply raised prices for younger and healthier applicants.

Additional regulations under the 1995 Point of Service law restricted the types of plans available in New York and required insurers to offer a generous (and expensive) package of minimum benefits.

To be successful, the state exchange should offer a much wider range of affordable health plans than are currently available to New York's uninsured.

If only a handful of expensive, comprehensive plans are available -- the same plans that can cost $1,000 or more a month today -- many budget-conscious uninsured may opt to stay uninsured and pay a small penalty under the Affordable Care Act's mandate requiring most citizens to have "qualified" health insurance. Without a large pool of healthy enrollees in the exchange, prices will climb even higher, and eventually the exchange will collapse.

Here's where the Affordable Care Act can actually help New York. The law requires guaranteed issue for all exchange plans, but it allows insurers to vary premiums by up to a 3-to-1 ratio based on age. New York allows no variation for age. The law's minimum benefits package also is less extensive than New York requires. Thus, the law puts less costly requirements on insurers than New York already imposes.

New York policymakers should allow insurers to offer any plan that meets the Affordable Care Act's basic standards on the state's exchange, including more affordable Health Savings Accounts and other high-deductible plans (today, HSAs aren't available in the state's direct-pay market).

They should reform the state's pure community-rating rules, and allow up to 3-to-1 premium variation based on age, as allowed by the Affordable Care Act. This would allow younger and healthier uninsured to find more affordable plans.

Building an insurance exchange driven by market competition -- within the basic outlines of the Affordable Care Act -- would be a substantial improvement over New York's high-cost status quo.